Interest on FCCBs not taxable in India, no TDS required under Section 196C. Revenue appeal dismissed.

The Tribunal upheld the CIT(A)'s order, ruling that interest paid on FCCBs did not accrue or arise in India and fell under the exclusion in Section 9(1)(v)(b). Therefore, the assessee was not required to deduct tax at source under Section 196C read with Section 115AC. The Revenue's appeal was dismissed.

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Issues Involved:
1. Liability to deduct tax at source under Section 196C read with Section 115AC on interest payable on FCCBs.
2. Applicability of Section 5(2) and Section 9(1) of the Income Tax Act.
3. Determination of situs of interest income for non-residents.
4. Consistency in tax deduction practices by the assessee.
5. Interpretation of Section 115AC as a comprehensive code.

Issue-Wise Detailed Analysis:

1. Liability to Deduct Tax at Source under Section 196C read with Section 115AC on Interest Payable on FCCBs:
The Revenue contended that the assessee was liable to deduct tax at source on interest paid to non-resident bondholders on Foreign Currency Convertible Bonds (FCCBs) under Section 196C read with Section 115AC. The Assessing Officer issued a show cause notice for non-deduction of tax at source and deemed the assessee in default under Section 201(1) of the Act. The assessee argued that the interest income of non-residents was outside the ambit of Section 5 of the Income Tax Act and was covered by the exclusion provided in Section 9(1)(v)(b).

2. Applicability of Section 5(2) and Section 9(1) of the Income Tax Act:
The Assessing Officer held that the interest income accrued or arose in India as soon as it became due to the bondholders, relying on the principle that the income is accrued when the right to receive it becomes vested. The officer argued that Section 5(2) should be read harmoniously with Section 9(1) to effectively enforce the charge in both provisions. The CIT(A) and the Tribunal, however, found that Section 9(1)(v)(b) specifically excludes interest payable on debts incurred for business or investment outside India, thus overriding the general provisions of Section 5(2).

3. Determination of Situs of Interest Income for Non-Residents:
The Tribunal observed that the interest income did not accrue or arise in India as the lending transaction took place outside India, and the funds were used for business or investment outside India. The Tribunal cited the judgment of the Hon'ble Madras High Court in C.G. Krishnaswami Naidu v. CIT, which held that the place where the money is actually lent is decisive in determining the situs of income. The Tribunal concluded that since the lending occurred outside India, the interest income did not accrue or arise in India.

4. Consistency in Tax Deduction Practices by the Assessee:
The Revenue argued that the assessee had deducted tax at source on similar interest income in earlier years and had stopped doing so without any change in facts or law. The Tribunal, however, upheld the CIT(A)'s decision, noting that the issue was already covered by the Tribunal's decision in the assessee's favor for the Assessment Year 2009-10, where it was held that no tax was deductible on such interest payments.

5. Interpretation of Section 115AC as a Comprehensive Code:
The CIT(A) noted that Section 115AC is a comprehensive code dealing with the taxation of interest on FCCBs, including the rate of tax and the requirement for tax deduction at source. The Tribunal agreed with the CIT(A) that if the interest income is not taxable in India, the provisions of Section 115AC and Section 196C do not apply. The Tribunal emphasized that the exclusion in Section 9(1)(v)(b) indicated that such interest income could not be deemed to accrue or arise in India, thus negating the requirement for tax deduction at source.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the interest paid on FCCBs did not accrue or arise in India and was covered by the exclusion in Section 9(1)(v)(b). Consequently, the assessee was not liable to deduct tax at source under Section 196C read with Section 115AC. The appeal filed by the Revenue was dismissed.

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